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France’s 2011 ISF Wealth Tax Reform: Logic, Risks and Costs

In a kind of double paradox, the French government started a major reform of the country’s capital taxes during the final year of the current legislature, concurrently with its dismantling of the “fiscal shield” that symbolised the 2007 TEPA Work, Employment and Purchasing Power law (Loi pour le Travail, l’Emploi et le Pouvoir d’Achat) that had been enacted at the beginning of President Sarkozy’s five-year term. This study seeks to highlight the political, economic and budgetary logic driving this reform; point out its legal and economic risks; and assess its budgetary and economic consequences. Following this analysis, we will conclude that although the capital tax reform is far from being the “enormous gift to the rich” that its critics allege, contrary to what the Government says it is also far from being “fully self-funded.” If applied in its current state, once the reform is up and running it will likely constitute a direct cost to the public purse of around €300 million per annum – without forgetting an indirect cost of ca. €200 million due to the relocations that will inevitably follow the elimination of current tax capping measures. Hence our assessment that the total annual cost of this reform will be around €500 million.